Climate looms large for incoming head of OSFI

Canada will soon have a new top financial watchdog and the successful candidate will be more of a climate cop than ever before.

The federal body that regulates big banks, insurers and pension funds has spent the past half year consulting with the industry and sketching out plans to calculate the risks of moving the country to net-zero carbon emissions – or failing to do so.

Jeremy Rudin’s term as head of the Office of the Superintendent of Financial Institutions (OSFI) comes to an end late this month. A burning question is how much pressure the new boss will apply on lenders to up their games when it comes to documenting and reducing CO2 emissions. That includes accounting for their own, but more importantly the labyrinthine task of tallying clients’ greenhouse gases – what are known as financed emissions.

Canada is already playing catch-up. OSFI’s European counterparts have taken a get-tough approach with banks and insurers when it comes to accounting for emissions, and it appears the U.S. is following suit. Here, there is little chance of meeting the goal for cutting emissions without the financial industry doing more heavy lifting.

The timing of the appointment is auspicious. The superintendent’s tenure is seven years, so the new boss will be at the helm as the really hard work gets under way to achieve a newly toughened national goal of reducing CO2 emissions 45 per cent from 2005 levels by 2030.

The federal Liberals have acknowledged that not all the plans for getting there are in place.

OSFI will play a key role. The body ensures that the country’s financial system and its players are not exposed to massive risk, and that has always meant dangers related to things such as debt levels and global crises. Now, climate change presents some of the biggest risks where lenders’ and pensioners’ money is exposed.

The European Central Bank has been clear that one of its priorities is compelling banks to align their business strategies with the goals of the Paris Agreement. That includes telling 112 institutions to assess their physical and transition risks. In addition, it is conducting a stress test over a 30-year time horizon to catalogue the impact of climate-related risks on banks’ balance sheets.

Last year, OSFI began gauging climate-related risk scenarios for the financial sector alongside the Bank of Canada and a handful of banks and insurers. The idea is to improve disclosure and increase understanding about the impact of the transition to a lower carbon economy. It is also conducting a consultation with the industry about climate risks, seeking input on how banks and pension plans define, identify, measure and build resistance to risks.

It’s all to get a handle on what the financial system faces, not just as global warming brings about changes to land and sea, but what happens to the value of carbon-intensive assets as the country moves to cleaner energy sources.

That is something Bank of Canada Governor Tiff Macklem warned about just last month – the risks to investors that have money tied up in such businesses as their commercial usefulness nears an end.

OSFI also highlights climate litigation risks. The legal question flared up last week when a Dutch court ordered Royal Dutch Shell PLC to toughen its emission-reduction plans to better align with the Paris Agreement goals. Legal experts warned it could have a spill-over effect elsewhere, including in Canada.

A tough balancing act for the rest of the decade will be financial institutions’ support for the oil and gas industry, as oil sands remain a target for green groups and investors with environmental agendas. The banks take flak for remaining major lenders to the industry as the energy transition gathers steam. Of course, energy companies remain major employers, and banks argue their role is to support Canadian business and help with the transition.

Assistant OSFI superintendent Ben Gully, a possible ascendant to the top job, said in April the regulator is still dealing with implementing rule changes stemming from the 2008-09 financial crisis. You can bet that OSFI will be dealing with climate and its risks for much longer than that as the world charts a path to net-zero by 2050.

Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. Email him at jeffjones@globeandmail.com.

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